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Payday Loans: Va GOP Leads The Way

If Virginia succeeds in pushing the payday loan industry out of the state, or at least rolling back its excesses to protect those who get sucked into a never-ending cycle of interest payments at usurious rates, credit the Republican leaders of the House--the very same folks who started out this legislative session in Richmond intent on highly partisan obstructionism.

House Speaker Bill Howell of Stafford County and others in the House leadership reached a compromise earlier this week--supported by key Democrats and the Black Caucus in the House, though not yet by Senate Democratic leaders more friendly to the payday loan industry-- that would cap interest rates at 36 percent. That's plenty high for just about everyone else on the planet, but not for payday loan companies. They have said for months that such a cap would force them to shut down their Virginia stores. This "is not a compromise that the industry can live with," lobbyist Reggie Jones told a House committee Tuesday.

Senate Majority Leader Dick Saslaw of Fairfax contends, as do industry lobbyists, that in states that have banned payday loans, the number of bankruptcies has shot up--a sign that the loans, however pernicious their interest rates, serve a purpose. But Saslaw is also frank enough to note that legislators sometimes make political decisions--not quite an admission that the industry's generous giving to political candidates is effective, but close enough.

One of the most important pieces of the House compromise is a limit that would be put on all customers, restricting them to five payday loans, no matter how many shops they might go to. In the past, D.C. area residents could get around such restrictions simply by crossing the Potomac River to another jurisdiction's payday loan shops. But now that the District has banned payday loans, that option would no longer be available.

Will the Senate stand in the way of reform that would protect people who fall victim to an industry that preys on people who are at their most desperate? It took bipartisan effort in the House--and that's usually the Senate's specialty.

By Marc Fisher |  February 7, 2008; 3:04 PM ET
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Why can't they just not take the loans if they are so abusive? It would be one thing if the business practice was clearly disceptive, but where is the evidence of this? They loan you 100 dollars and you pay back 110 in two weeks, where is the fraud if the terms are clearly stated? At least lawmakers, and columnists, should be honest and say they think people are too stupid to manage their own finances and the state has to take care of them.

Posted by: Dremit | February 7, 2008 3:55 PM

"Why can't people just not BUY the Pinto if it's so unsafe?"

Some practices are so repugnant - and exist only to prey on the vulnerable - that it's only just to ban them.

Posted by: Don | February 7, 2008 6:12 PM

"the very same folks who started out this legislative session in Richmond intent on highly partisan obstructionism."

Now that Marc has gotten his personal bias out of the way, let's discuss the topic at hand.

I have seen two sides to this:

(1) These lenders resemble sharks in the ocean. Once they smell blood it's all over. They should be stopped at all costs.

(2) People get into a financial bind and enter into a legal contract with full knowledge of the facts. They may not want to do this but they have no choice. It is the only way to avoid bankruptcy they have available.

All I've seen on this issue is these two sides. Somebody please tell me:

What is the happy medium?

How do we prevent this type of loan with the 50% interest rates and still help people avoid bankruptcy?

Why can't we get new ideas instead of political sound bites ... from the politicians and the WaPo blog authors.

Posted by: SoMD | February 8, 2008 7:39 AM

Sure, there's a happy medium.
Banks could set aside a small portion of their lending portfolios to make short term loans at affordable rates. They could copy what credit unions are increasingly doing.

Several credit unions have started, and more are joining, various low cost lending programs with an educational and savings component. Many require a small fee, limit the number of renewals, or don't allow renewals, and limit the amount of loans in a year. Some of the excess interest formerly paid to the payday sharks goes into a savings account, and rather than enrich those lenders, the member gets to see his/her own bank account grow so that the need for these loans decreases.

Posted by: Oy! | February 8, 2008 10:08 AM

If they were capable of maintaining saving accounts they wouldn't be looking to pay day lenders in the first place. Banks generally don't make these loans because the fixed costs of servicing them are more than they can earn in interest. But I think that sort of lending is certainly a better solution than forcing people out of business. Then the market can figure out which services the community best, rather than Marc Fisher or whoever in the VA legislature.

Posted by: Dremit | February 8, 2008 2:05 PM

How about a bill to keep these loan sharks away from VA military bases? U.S. troops are their favorite prey. Service families don't need the added pressure of 36 percent interest.

Posted by: Mike Licht | February 8, 2008 3:18 PM

"Service families don't need the added pressure of 36 percent interest."

I absolutely agree with you. We should definitely create separate (but equal) laws protecting one special interest group because all service members are incapable of making sound financial decisions. Obviously the government must protect them from themselves.

Posted by: Leesburger | February 8, 2008 4:00 PM

There is a limit on interest rates that can be charged to military personnel already, enacted in the past few months.
Interest rate is capped at 36%. See:

Negotiators agree to cap interest rates for loans to military
By Bill Swindell CongressDaily September 29, 2006

Conferees on the fiscal 2007 defense authorization bill agreed to include an amendment that would cap annual interest rates on loans to U.S. military personnel at 36 percent, despite strong lobbying by banking lobbyists.

Sen. Jim Talent, R-Mo., who originally proposed the language, complained that unscrupulous payday lenders were targeting uniformed personnel, which in effect threatened the country's military readiness. Some troops were paying as much as an 800 percent annual rate on loans.

The banking industry sought language that would carve out federally insured depository institutions from the proposed requirement, arguing they are already regulated by entities such as the Office of the Comptroller of the Currency and National Credit Union Administration.

But, according to a Senate aide, lawmakers only changed the language so the Defense Department would have to consult with banking regulators in devising a rule to execute the legislation.

"The measure will prevent any lender from trying to make a quick buck at the expense of the livelihood and future of those defending our freedom by charging a triple-digit interest rate," Talent said Friday. "For years, our strong coalition of supporters has been steadfast in seeing this measure get this far. Now that the conference has agreed to these new protections for our troops and their families, I'm confident that they will become law."

The provision gives Talent a populist issue to tout in his re-election bid against Democratic challenger Claire McCaskill, the Missouri auditor.

Posted by: Oy! | February 8, 2008 4:41 PM

And one more, below.

The point being, if you make enough money, and you live a fiscally sustainable life-style, you're OK. If you don't, or are living on the borderline, or have a major health issue, or some other extraordinary expense, or loss of income, you shouldn't be gouged at Mafia like rates to "fix" your problem.

There's a reason they're called "predatory" lenders. Put 400% loans offered around military bases full of young, inexperienced, under paid military families, and one or two small bad choices can multiply into a major fiscal hole nearly impossible to get out of.

I may be off on the math, but at a high credit card or loan rate of 36%, paying minimum (which includes a 2%(?) principal amout), for each $100, at the end of the year you owe something like $98, and will pay off the debt in a decade or so.

With a payday loan at a modest 400%, and no requirement to pay principal, only interest, you probably owe something like $400 at the end of a year for each $100 borrowed, not counting all the interest paid. The mafia should have it so good.

If a lender can't "survive" on a realistic interest rate, and help redirect some of that excessive fees/interest into a savings vehicle, well, what public good are they doing, other than keepping the lobbyists well fed?

SCRA Interest Rate Limits

One of the most significant provisions under the Servicemember's Civil Relief Act (SCRA) limits the amount of interest that may be collected on debts of persons in military service to 6 percent per year during the period of military service.

The expanded SCRA further states that no interest above 6 percent can accrue for credit obligations while on active duty, nor can that excess interest become due once the servicemember leaves active duty - instead that portion above 6 percent is permanently forgiven. Furthermore, the monthly payment must be reduced by the amount of interest saved during the covered period.

Posted by: Oy! | February 8, 2008 4:56 PM

It's interesting to see the idea of freedom used to justify payday lending. Our Founders -- and every Virginian leader since until the 21st century -- saw freedom quite differently. They saw us living together in freedom based on mutual responsibility -- whether that meant our responsibility to serve in the militia or to pay taxes -- or to observe some basic common rules of business fairness.

The idea that each one of us can survive as individual economic atoms, with no underlying rules, is strange and radical. It suggests that we are each capable of making rational economic decisions all the time, no matter what else is happening in our lives, and even if a sophisticated industry is spending millions to deceive and entice us.

This is not only a cruel idea, but an unrealistic one. It hardly deserves the name "conservative" or even "libertarian." It would destroy everything that humans have conserved, and take away every kind of liberty but the most theoretical economic kind.

This is why the House Republican leadership, listening to grassroots voices, is moving back towards our conservative and freedom-based traditions and away from the usury of payday lending.

Posted by: Larry Yates | February 16, 2008 12:42 AM


Posted by: Tee | February 19, 2008 4:01 PM

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